Are Co-integrated Stock Prices Consistent with the Efficient Market Hypothesis?

Authors

Edgar J. Wilson, University of WollongongFollow
Hazem A. Marashdeh, University of DubaiFollow

RIS ID

23215

Publication Details

Wilson, E. J. & Marashdeh, H. A. (2007). Are Co-integrated Stock Prices Consistent with the Efficient Market Hypothesis?. The Economic Record, 83 (s1), s87-s93.

Abstract

This paper responds to the unsatisfactory argument that there is nocorrespondence between co-integration and the efficient markethypothesis. A law of one co-integrating vector of prices is proposed forthe exchange rate and domestic and overseas stock prices. Markets musttherefore be efficient in long-run equilibrium because no arbitrageopportunities exist. However, arbitrage activity via the disequilibriumerror correction allows above-average (risk-adjusted) returns to beearned in the short run. The elimination of these arbitrage opportunitiesmeans that stock market inefficiency in the short run ensures stock marketefficiency in the long run.